Arbitration in Malaysia: Seat of Arbitration

Introduction

The seat of arbitration may be a peculiar concept to those not familiar with arbitration. Arbitration derives its powers and jurisdiction from a consensual and contractual manner. Being essentially a creature of contract, the creation and performance of arbitration, and the enforcement of an arbitral award depends on the contractual framework it is based on.

This in-turn relies on the parties’ agreement on several key factors such as the applicable law of the contract, the law of the arbitration agreement and the seat of arbitration. Parties are also entitled to agree whether to set any particular arbitral rules, arbitrators, the language to be used for the arbitration process, the venue of the arbitration and any other matters that the parties may deem relevant for the resolution of any dispute or difference that may arise during the course of the agreement’s performance.

When one speaks of the “seat of arbitration”, it primarily refers to the jurisdiction in which the national courts is seised to make determinations to ensure that the arbitral process is carried out smoothly. This may include making interim orders such as injunctions or security for costs, compelling evidence taking from external parties, and any recourse or remedies in respect of the arbitral award, to name a few. In an international arbitration, all these would enable the arbitral process to encounter less delays as the project or subject matter of the parties’ agreement might be in 1 country whilst the dispute resolution process, ie. arbitration, takes places in another neutral country.

Malaysia has the distinctive uniqueness where the Federal Constitution provides for 2 High Courts of co-ordinate jurisdiction and status, namely the High Court of Malaya at Kuala Lumpur and the High Court of Sabah & Sarawak at Kota Kinabalu (Art. 121 of the Federal Constitution).

This article explores the situation where the project was carried out in Sabah whereas the arbitration was concluded in Kuala Lumpur. On the face of it, it may not seem an issue as one could either seek either High Courts for the appropriate recourse. However, the distinctiveness in the Malaysian context meant that not only the legal profession is separated into 3 Bars but the High Courts are treated as “separate”. At the same time, it calls into question on the application of the “seat of arbitration” within the arbitration legislative framework, ie Arbitration Act 2005 [the “AA 2005”] as it is applies throughout Malaysia.

The Federal Court’s decision in Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd [2021] 6 MLJ 255 typifies the above issue and attempts to resolve it.

Background Facts

Masenang appointed Sabanilam to carry out a construction contract at Panampang, Sabah. Disputes arose and an arbitration took place in Kuala Lumpur resulting in an arbitral award in favour of Masenang.

Masenang applied to the Kuala Lumpur High Court [“KLHC”] to enforce the arbitral award. Sabanilam applied to the Kota Kinabalu High Court [“KKHC”] to set aside the arbitral award arguing that the cause of action arose in Sabah, hence the KKHC was the appropriate Court.

Masenang’s application to strike out Sabanilam’s setting aside application was allowed by the KKHC. The Court of Appeal reversed the decision by holding that either High Courts could hear the matter. As a result, the KKHC determine Sabanilam’s setting aside application, set aside a few paragraphs in the arbitral award and remitted the award back to the arbitrator for a re-hearing.

Findings

Federal Court reversed the Court of Appeal’s decision and clarified that:-

• while the arbitration in the present matter was a domestic arbitration, given the presence of 2 High Courts of co-ordinate jurisdiction and status, the seat of arbitration would fall either between Peninsular Malaysia or Sabah & Sarawak;
• if the seat of arbitration is within Peninsular Malaysia, it would be the High Court of Malaya at Kuala Lumpur that has supervisory jurisdiction. In this regard, the law governing civil disputes ( 23 of the Courts of Judicature Act 1964) [the “CJA”] in determining the jurisdiction of the court based on where the cause of action arose does not apply to the AA 2005;
• the AA 2005 is the exhaustive regime governing arbitration in Malaysia and it is considered as a special law (over arbitral matters) and would prevail over a general law governing the procedures of civil disputes.

Analysis

The Federal Court’s decision in Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd [2021] 6 MLJ 255 is welcomed as it resolves one of the tactical maneuvers where parties file applications in respect arbitration matters or awards at different High Courts.

Parties agreeing to arbitrate their disputes or differences in Malaysia would have to note to specify the seat of arbitration to a specific place within Malaysia, e.g Kuala Lumpur, Malaysia. This would avoid the issue like in Masenang from arising.

Where the arbitration agreement is silent on the seat of arbitration or where it adopts the Asian International Arbitration Centre (AIAC), for example, which is situated in Kuala Lumpur, as the appointing authority, then it is opine that following the curial law to be Malaysian law, the default seat of arbitration is Kuala Lumpur, Malaysia.